Telecom Italia eyes Europe tie-ups, cuts targets

SabrinaCohen

(This updates an item published at 1019 GMT with additional details, analysts' reaction)

MILAN (MarketWatch) -- Telecom Italia SpA
TI, -0.29%
is betting on industrial alliances with European peers and international expansion to combat falling margins in fixed and mobile businesses at home.

Unveiling its long-awaited 2007-2009 business plan, Italy's largest telecoms operator said it is in talks with several rivals -- including Spain's Telefonica SA
TEF, -0.35%
France Telecom (13330.FR) and Deutsche Telekom AG
DT
-- to explore forms of "cooperation" in specific areas.

Still, Italy's former monopoly Friday cut its estimates of organic growth and predicted margins would fall. It also warned it would lower its dividend next year to meet its debt reduction target.

Telecom Italia pledged to keep its closely-watched debt under control, so that at the end of each year the ratio of debt to Ebitda would remain below three times.

"Not providing a firm net debt figure but a debt/EBITDA guidance may not be an acceptable target for international rating agencies," said Maurizio Esentato, senior credit analyst at Calyon corporate investment bank in Milan.

As part of its business plan, Telecom Italia aims at increasing its international business -- with a focus on Brazil, Argentina, France and Germany -- from 16% of revenue to 30% by the end of 2009.

From 2009 the Italian group, through the exercise of call option rights, has the possibility of taking control of Sofora Telecomunicaciones SA, the holding company which controls Telecom Argentina and mobile carrier Telecom Personal.

In Brazil Telecom Italia said it is targeting a revenue rise of more than 15% this year, and an annual average increase of more than 10% between 2006 and 2009. Investments for the 2007-2009 period are expected to total about EUR2.4 billion.

The three-year plan also foresees the sale of EUR1 billion of non-strategic assets -- including stakes in Italian banks Mediobanca (MB.MI) and Capitalia SpA (CAP.MI).

Telecom Italia, which is betting on the upgrade of its fixed-line network into a "next generation network," plans industrial investments for a total of EUR15 billion, in line with previous forecasts.

The Italian group, like many former monopolies in Europe, has been hit by declining margins and stiffening competition by alternative operator such Fastweb (FWB.MI). This year it will also face the impact of a new government decree that banned fees imposed to recharge prepaid phone cards.

The Milan-bases company estimated the impact at up to EUR400 million during 2007, with the overall market impact put at about EUR800 million.

Falling Margins

Outlining the first business plan under his guidance, new chairman Guido Rossi said that Telecom Italia's talks with Telefonica and other operators are purely industrial and the company has never considered a share swap.

"The strategy is to look for areas of collaboration with all operators, including Telefonica, France Telecom and Deutsche Telekom," Rossi said in a press conference following the plan's presentation.

Telecom Italia said its organic revenue will grow 1% to 2% annually through 2009, lower than its earlier target of 3% to 4% annual growth rate through to 2008.

In particular, fixed-line revenue is expected to fall by between 2.5% and 3.5% from the 2006 level, while mobile line sales are forecast to fall by between 2% and 3%.

In order to counter falling margins in Italy, Telecom Italia expects to strengthen its international operations in Europe and South America, but the highly-indebted company said it wouldn't make any acquisitions for cash before 2009.

Telecom Italia shares Friday closed down EUR0.03, or 1.4%, at EUR2.13, in a lower overall market.

The plan is the first since Rossi took over in September after main shareholder Marco Tronchetti Provera quit in an open clash with the government over the group's future strategy.

It was seen as a key test by the financial community to clarify the strategy of Italy's largest telecommunications company and to explain how it plans to open its fixed line-network to competition.

Telecom Italia said it expects to wrap up negotiations with Italy's regulator on a plan to separate the company's fixed-line network by the second half of next year and implemented over a period of 18 to 24 months.

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